I am Chairman and CIO of Gramercy Capital Mgt. Corp., a NY registered investment advisor, which I founded in 1986. Gramercy has been ranked #1 in the Nelson's Directory of Registered Investment Advisors. I hold a B.A. in history from the University of Wisconsin, Madison and was awarded a Ford Foundation Fellowship. I earned an M.B.A. in financial accounting from the NYU Graduate School of Business and am also a CFA (Chartered Financial Analyst). I spent 15 years as a media and leisure analyst before I began managing OPM (other people's money) in 1980 at Manufacturers Hanover Trust where I oversaw their $250 million "mid-cap" fund. I have been the subject of feature stories in many publications such as The Wall Street Journal Business Week, Newsweek , and USA Today. I have appeared often as a guest on financial programs on CNBC, Bloomberg, PBS and Fox Business. I have been contributing to Forbes.com since 2006 so you can see my track record of commentary.

Ask Not What Karmazin Did For Sirius. Ask Instead What Sirius Did For Mel

Now that Mel Karmazin has left Sirius XM to pursue other interests, it’s time to take a real hard look at what Mel did for Sirius during his eight years at the helm. The 8 year stock chart is probably the best report card for his years of effort. By that measure, he was clearly a wealth destroyer for investors. For sure, Sirius in its infancy had only 600,000 shareholders when Mel arrived. Howard Stern was hired first but wasn’t able to come for another year until his Viacom contract expired. That gave Mel a year to prepare for the big marketing promotions and get ready for Howard to actually arrive. Together the two of them embarked on drawing interest to the company and listeners to its offerings.

Howard Stern was offered a 5 year package that at the time reportedly was worth $500 million. With Howard and his braggadocio, one is never really sure. He was happy to escape the confines of FCC regulated terrestrial radio where pushing the boundaries of propriety garnered him lots of listeners but cost his employers constant fines for overstepping decency boundaries.

What Howard really did for Sirius was to attract enormous attention and sales; lots and lots of sales. Howard was a sought after guest on all the evening talk shows. He generated publicity for Sirius wherever he went. The value in free advertising was a major part of the calculation in the value of his initial contract. However, because the stock price declined continuously with each passing year, it isn’t so clear if Howard ever really made the vast sums the publicity implied. He would have had to sell the shares he was paid the moment he received them. Since he wasn’t an officer of the company, he never had to file SEC reports on his purchases and sales so it was impossible to track what he was actually doing re: cashing out.

A quick look at the stock chart shows that early on, SIRI shot up in the weeks following the announcements that Howard was coming and that Mel was coming even sooner to get this new medium launched. To Mel’s credit, subscribers grew over the eight year period from 600,000 to over 23.4 million today. The growth of the satellite industry has been more or less continuous but it has not yet grown to its full potential. There are presently more than 243 million cars and trucks of all ages on the highways in the United States. Yet, after all these years, penetration for paid radio is still less than 10% of the vehicles on the road. Karmazin has never figured out how to break through that barrier and take Satellite Radio to the next level. Growth now is some percentage of new car sales. Good car sales years mean good sales for Sirius. Progress the last year or two proves that point.

At the outset, there was tremendous competition between XM and Sirius. The first battle was to attract car companies to build the satellite receivers into their particular cars. The next battle was to secure exclusive programming content. Since the sports franchises could play one off against the other, the prices paid to Major League Baseball and to the National Football League, were huge. For example, Sirius had agreed to pay the NFL $220 million for a 7 year contract even before Mel arrived. There was no way that the puny listener base would ever support that. But, chicken and egg prevailed. When the renewals have come up on these contracts, the prices paid have dropped since the duopoly became a monopoly.

The cash commitments to cover the cost of these huge contracts put both companies into a position where profitability was difficult to come by. The cost of launching satellites was high and whether they would make it into successful orbit was never a sure thing.

The single largest contribution that Mel made to Sirius XM was to sing and dance before Congress in a way that was sufficiently convincing as to get the FCC, the Justice Department and our elected officials on board with this monopolistic merger. One or the other or both of these companies are likely to have gone bankrupt without a combination. Sirius, as the surviving company, almost went bust anyway due to bad decisions by Mel and his sidekick, CFO David Frear.

After the two companies were combined earlier in 2009, Sirius was out selling its junk bonds to very willing buyers who loved the deal. They were offered more than enough money to carry them through to the promised land and more than they took. But Frear and Karmazin decided they didn’t like the prevailing interest rates. Instead, Sirius was left in a position of having excessive debt and no cash with which to make interest payments. That one horrendous decision put SIRI in a position such that when the credit markets froze up with the collapse of Lehman Bros., they were unable to raise any more money. The stocks that were punished the most at that time were those with very heavy leverage on their balance sheets. Sirius was at the top of that list.

Due to Karmazin’s bad choice to wait for better interest rates, the stock fell to a nickel. At the peak of the financial collapse, DISH’s Charlie Ergen smelled blood, as he is so adept at doing, and proceeded to buy up at a massive discount some of the short dated Sirius debt. He knew they were unable to make the payments. No matter what happened to the common shareholders, he was in a preferred postion. As usual, Ergen cleaned up.

The other shark in those waters was John Malone’s Liberty Media. For a loan of a meager $530 million, Malone received preferred stock that was convertible into 40% of the common shares of Sirius. All Malone had to do was to sit patiently until the three year standstill agreement expired before he moved in for the kill this year. Once it was known that SIRI would be able to make its interest payments, Sirius shares began to move higher. So did Ergen’s bonds. When SIRI reached $0.43 and again at $0.67 per share, Sirius granted vast numbers of options to Karmazin and Frear and the other corporate officers. They were invited to turn back high priced options that were worthless. The shareholders were never given such an offer. In other words, they were rewarded for their bad judgment not with being fired for the incompetence they demonstrated but with a mechanism that has allowed Mel to cash out over $200 million by exercising these options. Frear and the others also made millions.

When you look at the fact that over the long 8 years during which Karmazin ran Sirius into the ground and to within hours of bankruptcy protection, and thereafter the price of the shares has never recovered to half of what they were trading for in the first weeks of Karmazin’s employment. There has been no value creation for the shareholders, only for Mel, Frear and the other officers of the company.

Mel has never had the vision of how to expand the market share for his product beyond the 10% it has attained so far. He has never demonstrated a clear growth path for the assets that he has. His early claims that he was going to bring in significant advertising dollars stopped being mentioned in recent years and never amounted to much. So the real question here is if the stock is worth only half what it was eight years ago, just exactly did Mel do to justify a pay package that exceeded $200 million?

Considering that Liberty Media was given a license to coin money in this transaction and its $530 million initial investment is now worth billions, it would seem that Greg Maffei, John Malone’s right hand man in charge of the Sirius investment, should love Mel Karmazin to death. Maybe the options grant was their way of paying him back for providing Liberty with such a golden opportunity to coin money out of thin air just because they were cash rich at a time when Sirius was cash poor.

Karmazin was expected to depart at the end of February. Then on December 18th he abruptly resigned from the Board and tendered his resignation. Why he left early is not publicly known. In his parting remarks, Mel said he was sure Sirius’ future was brighter than ever. That said, in recent weeks he has continued to unload the remaining shares he owned in the company and exercising his remaining low priced options.

In summary, Mel took care of Mel. It isn’t so clear that he did much for long term shareholders if they didn’t average down when their investments were almost worthless. There was never a rights offering for existing shareholders at low prices so that the loyal holders could participate in some way in the recovery while raising cash for the company. Insiders did very handsomely. Too bad that wasn’t also true for the investing public.

Liberty has played its hand very close to its vest and little is known of its intentions of what it plans to do with these assets. Most of the focus has been on when the FCC will approve the change of control, should be any day now, and what form amongst the various Liberty “buckets” ownership will take. Malone and Maffei are two smart cookies. What will probably be much more interesting is what they will do with the licenses and the future development of the assets. To obtain control they have paid amounts above $2.70. So they must believe they have the potential to create further value.

As Mel has now “left the building” I am reminded of the old Carol Channing song in the Broadway smash Hello Dolly where she sings: “Wave your little hand and whisper so long dearie, dearie should have said so long, so long ago.”

Joan E. Lappin CFA Gramercy Capital Mgt. Corp.

Mrs. Lappin, Gramercy Capital and its clients own shares in Sirius XM at this time.

For information about Gramercy Capital email: info@gramercycapital.com. Follow Joan on Twitter @JoanLappin or follow her Forbes postings by clicking the button at the top of this article.

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